From the Securities and Exchange Commission (SEC)
SEC enhances transparency of proxy voting records
On Nov. 2, 2022, the SEC adopted amendments to Form N-PX to enhance the information that mutual funds, exchange-traded funds, and certain other registered funds report about their proxy votes. The amendments will make these funds’ proxy voting records easier to analyze, improving investors’ ability to monitor and compare different funds’ voting records. Additionally, the adopted rule will require institutional investment managers to disclose how they voted on executive compensation, or “say-on-pay” matters, meeting one of the rulemaking mandates of Dodd-Frank.
SEC Chair Gary Gensler said, “I am pleased to support these amendments because they will allow investors to better understand and analyze how their funds and managers are voting on shares held on their behalf.”
The new rules and form amendments will be effective for votes occurring on or after July 1, 2023, with the first filings subject to the amendments due in 2024.
SEC adopts compensation recovery listing standards and disclosure rules
The SEC on Oct. 26, 2022, adopted rules requiring securities exchanges to adopt listing standards that make issuers develop and implement a policy providing for the recovery of incentive-based compensation that was erroneously awarded to current or former executive officers. In accordance with the final rules, a listed issuer must file the policy as an exhibit to its annual report and include disclosures related to its recovery policy and recovery analysis where a recovery is triggered.
Implementing Section 10D of the Securities Exchange Act of 1934, a provision added by Dodd-Frank, new Exchange Act Rule 10D-1 also requires national securities exchanges and associations to establish listing standards that require disclosure of those compensation recovery policies in accordance with SEC rules, including providing the information in tagged data format.
Additionally, the new rules require specific disclosure of information about actions taken pursuant to the issuer’s recovery policy.
The final rules will be effective 60 days after publication in the Federal Register. Securities exchanges will be required to file proposed listing standards no later than 90 days following publication in the Federal Register, and the listing standards must be effective no later than one year following such publication. Issuers subject to such listing standards will be required to adopt a recovery policy no later than 60 days following the effective date.
SEC modernizes fund shareholder report and advertising rules
On Oct. 26, 2022, the SEC adopted rule and form amendments requiring mutual funds and exchange-traded funds to transmit concise and visually engaging shareholder reports. In addition, the amendments promote transparent and balanced presentations of fees and expenses in investment company advertisements.
Regarding fund shareholder reports, the amendments require funds to highlight key information, such as fund expenses, performance, and portfolio holdings. The use of graphic and text features is encouraged to make reports more effective. Also, funds will be required to tag the information in their reports in a structured data format and to make certain more in-depth information available online and available for delivery free of charge to investors on request.
The advertising rules require fee and expense presentations in registered investment company and business development company advertisements and sales literature to be consistent with relevant prospectus fee table presentations and to be reasonably current.
The amendments will be effective 60 days after publication in the Federal Register. The SEC is providing an 18-month transition period to adjust shareholder reports and transmission practices and to comply with the advertising amendments. The amendments addressing representations of fees and expenses that could be materially misleading apply on the effective date.
SEC approves final broker-dealer rule on securities-based swaps
On Oct. 12, 2022, the SEC adopted amendments to the requirements for electronic recordkeeping, prompt production of records, and third-party recordkeeping service applicable to broker-dealers, security-based swap dealers (SBSDs), and major security-based swap participants (MSBSPs). These amendments are intended to modernize recordkeeping requirements in light of new technologies in electronic recordkeeping.
The current broker-dealer electronic recordkeeping rule requires firms to preserve electronic records solely in a nonrewritable, nonerasable format. Among other requirements, the amendments add an audit trail alternative under which electronic records can be preserved in a manner that permits the re-creation of an original record if it is altered, overwritten, or erased; requires broker-dealers and all types of SBSDs and MSBSPs to produce electronic records to securities regulators in a reasonably usable electronic format; and eliminates the requirement that a broker-dealer notify its designated examining authority before employing an electronic recordkeeping system.
The amendments will be effective Jan. 3, 2023. Broker-dealers must comply with the new requirements six months after the effective date. SBSDs and MSBSPs must comply 12 months after the effective date.
SEC proposes changes to open-end fund liquidity framework
On Nov. 2, 2022, the SEC proposed rule and form amendments to better prepare open-end funds for stressed conditions and to mitigate dilution of shareholders’ interests. The amendments would change the existing framework by:
- Enhancing how open-end funds other than money market funds (MMFs) and certain exchange-traded funds (ETFs) classify the liquidity of their investments and requiring a minimum of at least 10% of net assets be highly liquid assets
- Requiring any open-end fund, other than a MMF or ETF, to use swing pricing and implementing a “hard close” to operationalize this pricing and to improve order processing
- Providing for more frequent, timelier, and more detailed public reporting of fund information, including information about funds’ liquidity and use of swing pricing
Comments are due 60 days after publication in the Federal Register.
SEC proposes new oversight requirements for outsourced services by investment advisers
The SEC on Oct. 26, 2022, proposed a new rule and rule amendments under the Investment Advisers Act of 1940 to prohibit registered investment advisers from outsourcing certain services and functions without meeting certain minimum requirements such as conducting due diligence and monitoring the service providers.
The proposal includes requirements for advisers:
- To conduct due diligence before outsourcing and to periodically monitor service providers’ performance and reassess whether to retain them
- To make and/or keep books and records related to the due diligence and monitoring requirements
- To conduct due diligence and monitoring for third-party recordkeepers and to obtain reasonable assurances that the third party will meet certain standards
Comments are due Dec. 27, 2022.
SEC commissioners address demand for quality ESG and climate-related data
SEC Commissioner Jaime Lizárraga spoke on Oct. 17, 2022, at the Future of ESG Data conference in London, on the demand for high-quality ESG data and actions of the SEC. Lizárraga highlighted the following three SEC rule proposals designed to facilitate comparable environmental, social, and governance (ESG) disclosures and focus on ensuring statements made to investors are not false or misleading:
- Enhanced climate risk disclosures by issuers
- Enhanced ESG disclosures by registered funds and investment advisers
- Modernized rules governing ESG-related fund names
Noting that the underlying principle to these proposals is ensuring investors receive the information they need to make the most informed investment decisions, Lizárraga said, “the SEC’s disclosure framework is most effective when investors benefit from objective, quantitative metrics that provide the highest degree of comparability. I believe the proposed rules are a significant step forward in getting investors this information. I look forward to working to ensure that the final rules are as robust as possible.”
He said that the data that investors want, and that is available, is always evolving and as a result of advances in technology such as emissions modeling, artificial intelligence, and big data analytics, this information is now both in demand and available. Therefore, the timing is right for the SEC to step in to ensure that investors have the most relevant information for their investment decisions.
He added that markets change, driven by technology or other factors, and investor needs and practices evolve. Challenges exist in keeping up with rapid change and updating the SEC regulatory framework so that it continues to meet investor needs without compromising protections and in ensuring that claims made to investors are supported by verifiable information and disclosures are not misleading. He concluded by noting, “The best way to get there is with meaningful disclosures that incorporate the highest quality, reliable, and verifiable data in a standardized and investor-useful format.”
On Oct. 21, 2022, at the inaugural European Corporate Governance Institute (ECGI) Responsible Capitalism Summit in Brussels, SEC Commissioner Caroline Crenshaw gave a speech discussing the SEC’s proposed climate-related disclosure rule. She highlighted that the proposal includes both qualitative and quantitative disclosure about climate-related risks and disaggregated climate-related risk impacts to existing line items in audited financial statements. She noted that investors are demanding and using climate-related information, which emphasizes the importance of reliable and comparable data. She said that markets already have evolved and are disclosing this climate-related information; however, the disclosures are made with varying degrees of specificity, standardization, and, sometimes, unreliability, which must be addressed to protect investors and help provide decision-useful information.
SEC commissioners comment on DE&I
In response to the 2021 Asset Management Advisory Committee’s (AMAC) report and recommendations to the SEC on diversity, equity, and inclusion (DE&I) and the lack of gender and racial diversity in the asset management industry, on Oct. 13, 2022, the SEC issued a staff FAQ addressing an adviser’s fiduciary duty when considering factors relating to DE&I in the selection or recommendation of other investment advisers. Commissioners Crenshaw and Lizárraga issued a statement supporting the FAQ, saying they believe all of the recommendations in the AMAC report warrant timely consideration. Both commissioners noted that they are committed to working with the chair and other commissioners in considering ideas or actions that would help provide transparency on diversity practices, potential biases, and other DE&I matters that are important to investors.
Related to DE&I, on Oct. 13, 2022, Lizárraga gave a speech at the Investment Company Institute Securities Development Conference on raising the bar on DE&I. He highlighted some startling statistics from the AMAC report on the lack of diversity in the asset management industry and said that DE&I can be challenging and controversial. He noted that progress can take time and that meaningful advances in DE&I require a combination of commitment, leadership, and constructive engagement. Lizárraga described the recommendations to the SEC from the AMAC and noted that the SEC’s spring rulemaking agenda includes planned rules relating to enhanced board diversity and human capital management disclosures. In closing, he stated, “There are many benefits that result from a long-term commitment to advancing diversity, equity, and inclusion.”
SEC chair speaks on enforcement
Chair Gensler on Nov. 2, 2022, spoke before the Practising Law Institute’s 54th Annual Institute on Securities Regulation. His speech focused on enforcement as part of effective administration. For the fiscal year ended Sept. 30, 2022, the SEC filed more than 700 actions and obtained judgments and orders totaling $6.4 billion, including $4 billion in civil penalties. He identified and explored five themes of effective administration of enforcement: economic realities, accountability, high-impact cases, process, and positions of trust.
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